- A pair of trends going on in the enterprise software business may help it weather the coronavirus crisis, Jai Das, an industry expert, told Business Insider.
- The shelter-in-place orders and the economic downturn have spurred interest in cloud-based software as an easier-to-manage, less costly alternative to running applications in corporate data centers or workstations, he said.
- Many recent enterprise software companies bill customers based on how many employees they have using their software, a model that could expose them to big revenue cuts with corporations slashing their workforces.
- But some software makers are moving to usage-based billing models, which could limit the losses, Das said.
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The enterprise software sector is already starting to feel the impact of the coronavirus crisis, but a pair of trends may help buoy the industry, one expert says.
The widespread shelter-in-place orders have spurred demand for software and services that run in the cloud rather than in corporate data centers, said Jai Das, president and managing director of Sapphire Ventures, which focuses on enterprise software startups. Meanwhile, software makers are moving from per-person billing models to usage-based ones, which could limit the damage to their revenue from customers cutting their staffs.
“Everybody saw a slowdown in April” as the pandemic throttled business activity, Das said. But because of such trends, “it wasn’t like completely the world [was] cratering. That didn’t happen.”
Many big companies have long operated their own data centers where they host applications and corporate information. But for many, the COVID-19 outbreak has made those setups seem more like a liability than an asset, Das said. Offices have been closed around the nation and world in an effort to limit the spread of the virus, which has made it difficult to get IT managers into corporate data centers to keep them up and running, he said.
In the past, some companies have turned to outsourcing firms such as Infosys to manage their data centers. But with many corporations slashing their budgets in response to falling revenue during the crisis, the cost of operating data centers, even under outsourcing arrangements, is coming under close scrutiny, Das said.
Most recent enterprise software startups host their applications in the cloud rather than on corporate servers or individual workstations. Now, according to Das, established companies are starting to see cloud-based technology as cost-competitive, less headache-inducing alternatives to managing their own data centers.
Companies are saying: “That is a budget that we don’t need to spend, let alone having the people there any more,” Das said. In terms of the applications they choose and use, he continued, “people are trying to move those as quickly as possible to the cloud.”
Usage-based pricing could replace per-user billing
In recent years, many enterprise software companies have moved to a subscription-based business model, charging customers monthly fees on a per-user basis. The danger of that model in an economic downturn is that with many companies laying off substantial portions of their staff, enterprise software makers could see their revenue slashed. A company that just cut 25% of its sales positions, for example, could theoretically reduce its spending on Salesforce’s software by that same 25% just based on having fewer people using it.
But some enterprise software companies are moving toward a different model that could limit such cuts, Das said. Cloud computing providers have long billed based on usage — how much of their computing resources a customer uses in a given month — rather than on the number of people within a corporate customer that have access to their services. Some enterprise software makers are heading in the same direction, Das said.
Slack, for example, bills customers based on their active number of users each month, rather than the total number of people within a company that have access to its service. It keeps close track of how many employees within a company are actually active during the month and adjusts customers’ bills based on that usage.
The general sense is that bills based on usage may not fall as much in the downturn as those based on numbers of total users, and that they’re fairer for both parties.
“Consumption-based pricing is one of the things that people are really focused on,” Das said.
To be sure, those trends are matched by others that are weighing on the sector. Hard-pressed corporate customers are ditching some enterprise software and services and asking for prices concessions on others. And as they’ve cut jobs, they’ve moved to cut their software bills.
It remains to be seen how those trends will balance out, Das said. Many enterprise software companies have seen interest in their services pick up in recent months even to record levels in some cases, he said.
“Everybody is watching carefully [to see] how well they convert into actual deals, actual revenue and how long it takes,” Das said.
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